Friday, October 3, 2014

Timing of latest fuel subsidy cut a surprise

PETALING JAYA - The latest round of fuel subsidy rationalisation
came as a surprise to researchers and analysts who, nevertheless, are
positive on the implications of the move, which could translate into
savings of an estimated RM1 billion for the government.

Effective today, retail prices of RON95 petrol and diesel are up 20
sen each to RM2.30 per litre and RM2.20 per litre, respectively. This
translates into a 9.5% increase for RON95 and 10% for diesel.

"We estimate that this fuel subsidy cut will save the government
around RM1.1 billion in 2014, thus helping to achieve fiscal deficit
target of 3% by 2015 and a balanced budget by 2020," AllianceDBS
Research economist Manokaran Mottain said in a note today.

Currently, the market price for RON95 is RM2.58 per litre and for diesel RM2.52 a litre.

Manokaran said the move to cut the fuel subsidy further came as a
surprise ahead of the tabling of Budget 2015 on Oct 10 and amid the
recent decline in global crude oil prices.

"Following the recent announcement of a delay in the introduction of a
multi-tiered mechanism for fuel, we had expected something like this to
come on Budget Day," he said.

Manokaran said the reduction in fuel subsidy was necessary as the
government had committed to bringing down the budget deficit to gross
domestic product ratio from an estimated 3.5% this year to 3% in 2015,
and to achieve a balanced budget by 2020.

However, in light of the latest fuel subsidy cut, Manokaran is now
expecting a delay in the announcement of a multi-tiered pricing
mechanism.

"We maintain our view that the current blanket subsidy mechanism has
to be changed to a multi-tiered subsidy structure based on household
income level.

"This is to ensure that subsidies are only channelled to the
lower-income group. We hope that the government will have strong
willpower to initiate the fuel subsidy reforms soon in order to ensure
the economy is more competitive," he said.

Manokaran expects inflation to spike again in the last quarter of
this year following the hike in fuel prices. "We maintain our view that
2014 full-year inflation will be 3.5% and inflation to hit 4% in 2015 on
the back of the Goods and Services Tax implementation," he said.

Meanwhile, HongLeong Investment Bank Research said that with the 20
sen fuel price increase, it sees no rush for the government to implement
the multi-tiered subsidy scheme, which has high complexity in
implementation.

"In line with the latest comments by the Ministry of Domestic Trade,
Cooperatives and Consumerism, we now expect the new fuel scheme to be
rolled out in early 2015," its economist Sia Ket Ee said.

Coupled with the recent weakening of crude oil prices, he said, the
government's fuel subsidy per litre is now as low as 28 sen to 32 sen
per litre.

"As we expect crude oil prices to remain weak in the near term, the
government's subsidy bill is expected to be well contained," Sia said.

He said savings from the subsidy cuts will likely be channelled to
other economic services and social spending, expecting an additional
RM150 in BR1M payment for 2015, or an extra RM1.2 billion.

The BR1M payout announced in Budget 2014 was RM650 for households and
RM300 for singles. A BR1M payment of RM450 was also given to households
with a monthly income of between RM3,000 and RM4,000.

RHB Research said the hike in fuel prices will likely hurt consumer
and business spending somewhat but it will likely be manageable.

It expects inflation pressure to hold up in the fourth quarter
following the fuel prices hike today, which will spill-over into other
end-product and service prices gradually.

"Given that the weights for petrol and diesel account for about 7.5%
and 0.2% respectively of the Consumer Price Index, the hikes in retail
petrol and diesel prices are expected to add 0.7 percentage point to the
inflation rate in October.

"However, the impact on inflation will likely be more muted due to the higher base effect in the 4Q of 2013," it said.

In light of the fuel price hike, RHB Research now expects inflation
to come in at the higher end of its forecast of 3% to 3.4% in 2014,
compared with 2.1% in 2013.

While inflation is expected to hold up in the fourth quarter due to
the higher fuel prices, it opined that the country will likely
experience a more moderate pace of economic growth in the second half of
this year. -Sundaily